By Jigar Trivedi
Spot gold hovered in a tight range from $ 1,740 to $1,755 an ounce as the dollar continued to advance after Fed officials echoed an aggressive rate hike going ahead. The holding at the SPDR Gold ETF declined to 984 tonnes as on 25th August 2022 as compared to 1,005 tonnes as on 29th July 2022. The dollar hit almost 20 year high as several Fed policymakers have been pointing to the need to move rates to a restrictive territory, highlighting the necessity to bring inflation down to its 2% target and erasing previous expectations of a dovish pivot despite recent data suggesting that inflation may be cooling.
The S&P US Manufacturing PMI fell to 51.3 in August of 2022 from 52.2 in July, below forecasts of 52, and pointing to the lowest growth in factory activity since July of 2020, amid muted demand conditions and production cutbacks. Output contracted for the second successive month. Higher input prices also served to dampen customer demand, as some firms stated that clients were monitoring inventories and essential spending more closely. New orders for US manufactured durable goods unexpectedly were unchanged from a month earlier in July of 2022, disappointing market expectations of a 0.6% increase and following an upwardly revised 2.2 percent rise in June.
Pending home sales in the US declined 1% month-over-month in July of 2022, following an upwardly revised 8.9% fall in June, and much less than market forecasts of a 4% decline, reflecting the recent retreat in mortgage rates. Sales fell in the Midwest (-2.7%), the Northeast (-1.9%) and the South (-1.1%) but rose 2.2% in the West.
The US economy contracted an annualized 0.6% on quarter in Q2 2022, less than a 0.9% fall in the advance estimate, due to upward revisions to consumer spending and inventories. Still, the economy technically entered a recession, following a 1.6% drop in Q1. PCE grew 1.5%, higher than 1% in the advance estimate, led by food services and accommodations while spending on goods went down 2.4% (vs -4.4% in the advance estimate), namely food and beverages.
Also, private inventory investment was revised higher though it remained a drag mainly due to retail trade. Also, net trade made a positive contribution for the first time in 2 years, as exports jumped 17.6% (vs 18%), led by industrial supplies, materials and travel while imports were up 2.8% (vs 3.1%).
The number of Americans filing new claims for unemployment benefits went down by 2 thousand to 243 thousand in the week ended August 20th from a downwardly revised 245 thousand in the previous period and well below the market estimate of 253 thousand. It was the lowest level for initial claims since the week ended July 23rd.
The 10-year US Treasury note yield consolidated above the 3% mark, closing in on its highest level in two months, as investors braced for a hawkish message from Fed Chair Powell at the Jackson Hole symposium.
Now all eyes are on Powell’s widely-anticipated speech, which investors hope will offer clues on the US central bank’s tightening plans, with the most likely outcome from a hawkish view to be a rise in yields at both the front and back of the yield curve.
ECB policy makers noted that the 50bps rate hike delivered in July should be regarded as frontloading the exit from negative rates and necessary to normalize monetary policy, rather than indicating a change in the rate to be expected as the end-point of the normalization cycle, minutes from the ECB’s July 2022 meeting showed.
At the same time, additional increases in borrowing costs will be made on a meeting-by-meeting basis and will be data-dependent, although further hikes should be appropriate in upcoming meetings. Minutes also showed there was unanimous support for the new Transmission Protection Instrument.
Meanwhile, ECB policymakers considered that inflation risks have increased and noted a downturn in euro area economic activity could extend into 2023. The ECB raised its 3 key interest rates by 50bps during its July 2022 meeting, the first increase since 2011, ending eight years of negative rates, in an attempt to release the inflationary pressures.
Next week is going to be the holiday shortened week in India due to Ganesh Chaturthi. Couple of important data will be released next week like ADP employment change, ISM non-manufacturing PMI and non-farm payrolls for August. The week will be short and data dependent. We may see a price range from Rs. 51,000 to Rs. 51,900 / 10 gram in the week ahead.
(Jigar M Trivedi, Senior Analyst Currency & Commodities, Reliance Securities Limited. Views expressed are the author’s own.)